macro tutorials

8/9/2019 Macro Tutorials

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University of the Witwatersrand

School of Economic and Business Sciences

Economics 1B (ECON1009)

Macroeconomics Tutorial Program: 2012

Please refer to the Economics 1 Handbook for notes relating to tutorials

First Semester: Teaching Blocks 1 & 2

Tutorial Co-ordination

If you have questions about the economics 1 tutorial programme, speak to your tutor orcontact the Economics 1 head tutor, Mr A. Jardine . His office is room 234, on the 2nd floor

of the New Commerce Building (NCB), email: [email protected]

If you have any issues with the tutor or the head tutor, you can contact the tutor coordinatorof the School of Economic and Business Sciences, Mr M . Dhlamini. His office is room 234,on the 2nd floor of the New Commerce Building (NCB), email: [email protected]

Tutorials

Tutorials are a vital component of the course. When you write tests and examinations (see below), the questions you will be expected to answer will be similar in nature to those in thetutorials. It is essential, therefore, to prepare tutorials thoroughly and revise them in

preparation for tests and examinations. You are required to prepare written solutions to eachtutorial question before the tutorial class. Your tutor will check that you have done this, andwill, from time to time, take in your written tutorials so that s/he can review the progress ofthe tutorial group.

Under no circumstances should you arrive at tutorials expecting the tutor to give full

answers with no class participation. The tutors have been instructed NOT to hand out

model answers to tutorial questions. It is up to you to use the tutorials to test your own

understanding and to get feedback on your answers to the tutorial questions!


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In order to participate meaningfully in tutorials, you need to come to each tutorial fully prepared. You should adopt the following approach.

Read through the tutorial to see which aspects of the course are covered.

Study these sections as though you were preparing for a test or examination.

Attempt each question in the tutorial under examination conditions, i.e. write out yourresponses without referring to your notes or book.

Where there are questions which you have not been able to do or you feel your answer isinadequate, consult your notes or book and use these to help you. When your tutor asksyou for your answer to a tutorial question, you should be able to give a good explanationof the answer to the whole class.

If you still feel unsure about your answer, identify precisely why you think there is a problem. Your tutor will then be in a much better position to help you to understandspecific sections of the work.

Tutorials are an opportunity for you to discuss the course more broadly with the rest of theclass. The tutor is there to facilitate this discussion and explain particular aspects of thework. As there is unlikely to be sufficient time in each tutorial to cover all the tutorialquestions, you need to identify the areas which you find difficult and use the opportunity todiscuss these with the class and the tutor.

Thorough preparation is your key to doing well in this course. You need to get as much

practice as you can in actively doing economics yourself. Passively watching the

lecturer or tutor do economics for you will not provide you with a particularly

rewarding learning experience.


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COURSE OUTLINE

The chapter numbers given below refer to the 7th edition of Economics by Parkin, Powelland Matthews. The dates provide a guideline only: some groups may run ahead of schedule,while others may fall behind. Please consult the notice board for any changes.

1ST

SEMESTER: MACROECONOMICS: (ECON1009 repeat students)

Block 1

Week & Date TopicChapter

Reference

Homework

Tutorial work

Tests

Week 1

13 - 17 Feb A first look at

macroeconomics

Measuring GDP

Ch 20

Ch 21

Read ch20, 21 & 22

Week 2

20 - 24 Feb Measuring GDP (cont.)

Monitoring jobs and the pricelevel

Ch 21

Ch 22

Read ch25

Ignite tut 1 submission(ch20,21&22)

Week 3

27 Feb - 2 Mar The Keynesian Model

“Mathematical Note” (Short-run aggregate demand)

Ch 25+app.(excl. pgs580-581)

Read ch24

Tutor consultation (tut 1)

Ignite tut 2 submission (ch25)

Week 4

5- 9 Mar The Classical model

(Long-run aggregate supply)

Essay skills

Ch 24 Read ch23


Ignite tut 3 hand-in (ch24)

Week 5

12 - 16 Mar Aggregate supply and

aggregate demand Ch 23 Read ch26



Week 6

19 - 23 Mar(4 days)

Fiscal policy

Test prep.

Ch 26 Test prep.



Week 7 26 – 30 Mar

Revision/Review/Catch-up N/A Read ch27TEST 1 (Ch 20-25)

(Tues 27th March,17h15)

31 Mar – 9 Apr: Study Break


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Block 2

Week & Date TopicChapter

Reference

Homework

Tutorial work

Tests

Week 8

9 - 13 Apr(4 days)

Fiscal policy recap.

Money and banking

Ch 26

Ch 27

Read ch28



Week 9

16 - 20 April Monetary policy Ch 28 Read ch29



Week 10

23 - 27 Apr

(4 days)

Fiscal and monetaryinteractions

Ch 29 Read ch12



Week 11

30 May - 4 Jun(4 days)

The ISLM model

Inflation

Ch 29 app.

Ch 30

Read ch14


Ignite tut 9 submission(ch29 app. & ch30)

Week 12

7 - 11 May International finance

Test prep

Ch 33 Test prep


Ignite tut10 submission(ch30&33)

Week 13

14 - 18 May Revision/Review/Catch-up N/A Tutor consultation (tut 10)

TEST 2 (Ch 20-30)

(Tues 13th May,17h15)

Week 14

21 - 25 May Exam prep Ch 20-33

(excl. Ch31 & 32)

Exam prep

28 May – 22 June: Exams

23 June –

15 July: Winter Vac


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MCQ 1 In which year does Fantasyland experience an Okun gap?

A. 2000B.

2001

C.

2002D. 2003E.

2004

MCQ 2 Okun’s gap is usually quantified using “Okun’s Law” which states that for every 1% that the

unemployment rate exceeds the natural rate of unemployment, real GDP is roughly 2% lowerthan potential GDP.

Based on Okun’s law what is the actual unemployment rate in Fantasyland for 2003?

A. 0%B.

21.43%C. 24.1%D.

25.69%E. 27.78%

MCQ 3 Assume that Fantasyland has a working age population (i.e. aged between 15 and 65) of 35million. Of these, 13.7 million are employed while 8.1 are unemployed. What is theunemployment rate?

A. 23.14%B. 37.16%C. 39.14%D. 59.12%E. 62.23%

MCQ 4

In 1980, the nominal value of GDP was R15400 million, while in 2000, the nominal value ofGDP was R17690 million. Using 1970 as the base year (i.e GDP deflator of 1970 = 100), theGDP deflator of 1980 was 136 and the GDP deflator of 2000 was 162. Using 1970s prices,we can say that real GDP between 1980 and 2000 has:

A.

Increased by approximately R2290 millionB. Decreased by approximately R400 millionC.

Decreased by approximately R 2300 millionD. Increased by approximately R400 millionE. Cannot be answered with the given information


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MCQ 5 When economists speak of full-employment they mean that:

(i) everyone who wants a job is employed (ii)

there is still some frictional unemployment

(iii)

there is still some structural unemployment (iv) there is no cyclical unemployment

A. only (i) is correctB.

only (i) and (iv) are correctC. only (ii) and (iii) are correctD. only (ii), (iii) and (iv) are correctE.

only (i), (ii) and (iii) are correct

Macro tutori al 2 Chapter 25

Written question 1The following information refers to an open-mixed economy. Suppose that initially thegovernment neither taxes nor has any expenditure on domestic output. Assume fixed prices.Except for the marginal propensity to consume, all figures are in currency units.

C = 150 + 0.75Y

Ig = 125

G = 0 and T = 0 X = 80

M = 205

where C is consumption, Y is real GDP, Ig is planned investment (gross), X is exports, M isimports, G is government spending and T is the lump-sum tax.

(i) Derive an equation for aggregate expenditure (AE) as a function of real GDP (Y).

(ii)

Using your equation from question (i), calculate AE for each R100 increase of GDP(starting with no real output, i.e. GDP=0, up to GDP = R1000) and draw theAggregate Expenditure model. (Hint: use R100 steps for both axes and copy the table

below into your workbook and fill it in).

(iii) Suppose that exports decrease to X = R75 and imports increase to M = 275. Draw thenew aggregate expenditure function in the diagram and briefly explain (in less than1/3 of a page) how equilibrium is re-established in the economy.

Y 0 100 200 300 400 500 600 700 800 900 1000

AE1(Q1:ii)

Y 0 100 200 300 400 500 600 700 800 900 1000AE2(Q1:iii)


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MCQ 1

Using your answers to (ii), what is the equilibrium value of real GDP (Y) using the short-runaggregate expenditure model?

A.

R300

B.

R400C. R500D.

R600E. R700

MCQ 2Using the short-run aggregate expenditure model and your answer to (iii), what is the newequilibrium value of real GDP (Y)?

A.

R300

B.

R400C. R500D.

R600E. R700

MCQ 3Suppose that the economy is at the equilibrium calculated in MCQ 2 and that full-employment (i.e. potential) GDP is R1000. What is the value of the GDP gap?

A. -R300B.

-R400C.

-R500D. -R600E. -R700

MCQ 4 Assume that there was an initial increase in investment spending of R1000 and that the MPCis equal to 0.8. Also assume that imports and taxation are independent of real GDP (Y).Which of the following statements is/are true?

(i)

the multiplier is 4(ii) after the initial spending of R1000, R200 is saved by the household that

received the R1000 as income(iii)

the total change in GDP resulting from the initial R1000 change in spending isR5000

(iv) the marginal propensity to save is 20% of disposable income

A. only (i) is correctB. only (ii) and (iii) are correctC. only (i) and (iv) are correct

D.

only (ii), (iii) and (iv) are correctE. (i), (ii), (iii) and (iv) are correct


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MCQ 5 Assume a linear consumption schedule where a > 0 (a = autonomous consumption). Whenthe disposable income increases then:

A. the marginal propensity to consume increases

B.

the marginal propensity to save increasesC. the average propensity to consume increasesD. the average propensity to save increasesE. the average propensity to consume remains constant


Written question 1

Suppose the SA government increases spending on education. Using the classical (long run)model and diagrams of the labour market and production function, illustrate the effects such a

policy may have. Your explanation should include 1/3 of a page of written explanation.(Hint: Explain the process whereby this policy may affect GDP.)

Written question 2

Using the classical model, illustrate (using diagrams) and briefly (less than 1/3 of a page)discuss 2 other possible reasons for high unemployment in SA and the consequences of high

unemployment to South Africa’s economy.

MCQ 1

The classical model suggests that South Africa’s potential GDP can be increased from twosources: increased productivity and greater resource endowment. In the classical framework,which of these activities can bring about economic growth?

(i) An increase in the amount of physical capital available(ii) Closing down schools(iii) Chasing away farmers

(iv)

Immigration of skilled Zimbabwean farm workers into South Africa

A.

Only (i) is correct.B. Only (i) and (iv) are correct.C.

Only (ii) and (iii) are correct.D. Only (iii) and (iv) are correct.E. Only (i) and (iii) are correct.


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MCQ 2

Flexibility in real wages determines the slope of the:

A.

long run supply curve of labour

B.

short run aggregate demand curveC. long run aggregate supply curveD.

short run aggregate supply curveE. long run aggregate demand curve

MCQ 3

Improvements in the South African education system will result in, ceteris paribus:

(i)

an upward shift of the production function.

(ii)

a movement along the labour supply curve.(iii) an increase in the marginal product of labour and the labour demand curve

will shift to the right.(iv) real wages increasing.(v)

the natural rate of unemployment decreasing.

A. Only (i), (ii) and (iv) are correct.B.

Only (iii), and (iv) are correct.C. Only (i), (ii), (iv) and (v) are correct.D.

Only (iii), (iv) and (v) are correct.E. (i), (ii), (iii), (iv) and (v) are correct.

MCQ 4

South Africa suffers from unusually high unemployment – officially about 25%. One possible reason is the presence of a minimum wage. Minimum wage can result inunemployment above the natural rate when (Hint: remember the work covered chs 6 and 17):

A. the quantity of labour supplied is greater than the quantity of labour demanded andthe minimum wage is not binding.

B.

the minimum wage is set below the full employment equilibrium price level.C. the quantity of labour supplied is greater than the quantity of labour demanded andthe minimum wage is binding.

D. the quantity of labour demanded is greater than the quantity of labour supplied andthe minimum wage is not binding.

E.

none of the above


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MCQ 5

Use this figure, which illustrates the classical model labour market, to answer the followingquestion. The original supply and demand curves are denoted S0 and D0 respectively. Theletter P in parentheses indicates the price level.

Consider the following statements:

(i) The quantity of labour demanded varies inversely with the money wage rate(ii)

When the demand for labour shifts from D0 to D1, this is an indication that thegeneral price level has declined.

(iii)

A movement from point “a” to point “ b” indicates an increase in the moneywage rate.

(iv)

A movement from point “a” to point “ b” represents an increase in real wages.(v)

The movement from point “a” to point “ b” shows that, as a result of anincrease in the real wage rate, firms decide to hire fewer workers and to

produce less output.

Which of the following options is/are correct?

A. Only (ii),(iii) and (iv) are correctB. Only (i), (iii) and (v) are correctC.

Only (i) and (v) are correct

D.

Only (i) and (iii) are correctE. Only (i) is correct

Money wage rate

b

a

S1 (P=150)

S0 (P=100)

D1 (P=150)

D0 (P=100)

0L Full Employment Labour


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MCQ 2 Which of the following is/are correct in the classical model:

(i) A government budget deficit can be financed by purchasing bonds in theloanable funds market

(ii)

The short run aggregate supply curve is upward sloping because of theassumption that real wages do not adjust fully to changes in prices

(iii)

In the long run, government can increase potential GDP by increasinggovernment spending

(iv)

The nominal interest rate is approximately the real interest rate plus theinflation rate

A.

(i) onlyB. (i) and (iii) onlyC. (ii) and (iii) onlyD.

(ii) and (iv) only

E.

(ii), (iii) and (iv) only

MCQ 3Which of the following statements regarding the short-run AD-AS model is correct?

(i) A recessionary gap occurs when equilibrium real GDP is greater than the full-employment level of real GDP

(ii) If an economy is originally at full employment, an increase in the real interestrate will result in the economy moving to a below full-employmentequilibrium.

(iii)

If an economy is at an equilibrium real GDP level that is above full-employment, an increase in the nominal wage rate will result in an increase inthe price level.

(iv) If an economy is at an equilibrium real GDP level that is below-fullemployment, the appreciation in the currency of that economy could result init recovering towards full employment.

A. Only (i) and (iii) are correct.B. Only (ii) and (iii) are correct.C.

Only (iii) and (iv) are correct.

D.

Only (ii),(iii) and (iv) are correct.E.

Only (i), (iii) and (iv) are correct.

MCQ 4If we are at the natural rate of unemployment, an increase in aggregate demand will lowerunemployment in the short-run:

A. regardless of workers' price rise estimateB. if workers overestimate the consequent price riseC. if workers underestimate the consequent price rise

D.

if workers perfectly anticipate the consequent price riseE.

None of the above


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MCQ 5

Which of the following statements is/are correct?

(i) Aggregate demand does not influence potential real GDP.(ii)

An increase in the price of domestic currency in the foreign exchange market

increases aggregate demand.(iii) Advances in technology shift the long-run aggregate supply schedule only.(iv)

The relative price of inputs remains constant in the long run.(v) An increase in expected inflation accompanied by an advance in technology

will have an ambiguous effect on real GDP in the short run.

A. Only (ii) and (iii) are correct. B.

Only (iii) and (iv) are correct C. Only (iii) and (v) are correct D. Only (v) is correct. E.

Only (i) is correct.


Written Question 1

a) Describe (in words) the change in aggregate supply that would result from each of thefollowing changes in determinants ceteris paribus. (i) A rise in the average price of

inputs; (ii) An increase in worker productivity; (iii) Government antipollutionregulations become stricter; (iv) A new subsidy program is enacted for new businessinvestment in productive equipment; (v) Energy prices decline.

b) What determines the equilibrium price level and level of real domestic output in theaggregate demand – aggregate supply model (1 paragraph)?

c)

What happens to bring the AD – AS system back into equilibrium when prices are (i) below and (ii) above the equilibrium level (1 paragraph each)?

MCQ 1Automatic stabilizers ensure that:

A. the government budget is always balancedB. tax structure automatically eases the tax burden during recessions and increases the tax

burden during recoveriesC. tax structure automatically decreases government spending during recessions and

increases the spending during peaksD. tax revenues change inversely with changes in GDPE. the government does not overspend its budget


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MCQ 2

Which of the following tools can the South African Government use to pursue anexpansionary fiscal policy?

(i)

Selling bonds to the public

(ii)

Increase government spending(iii) Decrease taxes(iv)

Increase taxes

A.

only (i) and (iv) are correctB. only (ii) and (iii) are correctC. only (i), (ii) and (iii) are correctD.

only (ii), (iii) and (iv) are correctE. (i), (ii), (iii) and (iv) are correct

MCQ 3Assume that the government pursues a contractionary fiscal policy to fight inflationary

pressure in the economy. Which of the following are potential outcomes?

(i) Aggregate demand will decrease due to higher interest rates.(ii) Interest sensitive expenditure increases and offsets some of the contractionary

fiscal policy objectives.(iii) Exports decrease due to an exchange rate appreciation.(iv)

Imports decrease due to an exchange rate depreciation.

A.

only (i) and (iii) are correctB.

only (ii) and (iii) are correctC. only (ii) and (iv) are correctD. only (i), (ii) and (iii) are correctE.

only (ii), (iii) and (iv) are correct

MCQ 4In the long run and when starting from a position of full employment:

A. an expansionary fiscal policy will result in an increase in the equilibrium level of real

GDP with no change to the equilibrium price level.B. a contractionary monetary policy will result in an decrease in the equilibrium level of

real GDP and an increase in the equilibrium price.C. an expansionary fiscal policy will result in no change in the equilibrium level of real

GDP and an increase in the equilibrium price level.D. a contractionary monetary policy will result in no change in the equilibrium level of

real GDP and an increase in the equilibrium price level.E. an expansionary monetary policy will result in an increase in the equilibrium level of

real GDP and a decrease in the equilibrium price.


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MCQ 5

A simultaneous and equal increase in government spending and taxes will:

A. have no impact on GDPB.

help to relieve an inflationary gap

C.

increase GDPD. decrease GDPE.

none of the above is/are correct

Macro tutor ial 6 Chapter 27

Written question 1

“The main purpose of required reserves is to promote bank liquidity and protect depositors.”

Evaluate the statement above – Do you agree or disagree with the statement and give reasonsfor you answer. Your explanation should include 1/3 of a page of written explanation.

Written question 2 Why are reserves listed in the assets column of a bank’s balance sheet (1 paragraph)?

MCQ 1

Initially, all commercial banks in South Africa have zero excess reserves. The Reserve Bank

then buys securities to the value of R200 000 from ABSA. In addition, the desired reserveratio of all banks is 8% and the currency drainage ratio is 60%. Which of the following is/arecorrect? (All values to be rounded off to two decimal places)

(i) The intial increase in the monetary base is R 120 000(ii)

R 75 000 is drained off as currency(iii) Immediately after the purchase, the banking system will have excess reserves of

R 184 000(iv)

The total amount of money created by the entire banking system is R 470 000

A.

Only (i) and (ii) are correct.

B.

Only (i), (ii) and (iii) are correct.C. Only (ii), (iii) and (iv) are correct.D.

Only (ii) and (iv) are correct.E. Only (i), (iii) and (iv) are correct.


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MCQ 2

Use the following diagram of the money market to answer the question that follows. Assumethat money supply is independent of the interest rate (i.e. money supply is vertical). Assumethat the initial equilibrium in the money market is shown by the intersection of Sm and Dm1 with the equilibrium interest rate i1, in the short run. Which of the following options is

correct?

A. With an increase in real output, the demand for money will shift to Dm3 and the interestrate falls to i3.

B. The shift of Dm1 to Dm2 creates an excess quantity of money demanded and people startselling bonds. The price of bonds decreases which increases the interest rate.

C.

When people decide to hold less money at any given interest rate, the price of bondsdecreases and the interest rate increases to i2.

D. The shift of Dm1 to Dm3 creates an excess quantity of money supplied in the moneymarket and people start selling bonds. The price of bonds decreases which increases theinterest rate.

E.

A decrease in real output will not affect the demand for money and the interest rateremains at i1.

MCQ 3 Initially all Commercial Banks have zero excess reserves, except Zee Bank which has thefollowing:

Excess reserves: R50000Currency drain ratio: 60%Desired reserves: 10%

What is the new initial value of Commercial Banks Deposits?

A.

R 20 000B. R 31 250C. R 42 857D. R45 000E. R15 000

iSm

Dm2

Dm3 Dm1

i1

i2

i3

Qmoney


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MCQ 4

A decrease in the income tax rate can cause which of the following to occur?

(i) An increase in potential GDP(ii)

A decrease in the equilibrium level of labour

(iii)

An increase in the equilibrium level of capital(iv) A decrease in real GDP(v)

An increase in aggregate demand

A.

Only (i) is correctB. Only (i), (iii) and (v) are correctC. Only (iii), (iv) and (v) are correctD.

Only (ii) and (iv) are correctE. Only (iii) and (v) are correct

MCQ 5 Use the information in the table below to answer the following question (values are in

billions of Rands):

Monetary Base 60.8

Quantity of money 75.25

Desired currency holdings 34.65

The money multiplier is approximately:

A.

4.753B.

8.367C. 0.893D. 1.238E.

-2.349

Macro tutori al 7 Chapters 28

Written question 1

In 2008, the South African economy experienced “excessively high inflation”. Most

economists believe this was due to high oil prices. Others believe it was a result of interestrates that were kept too low.

Illustrate using the AD-AS model how (i) high oil prices and (ii) low interest rates can lead toinflation. (Hint: do each case separately, each case requires about 1/3 of a page of writing).


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MCQ 1

Suppose the monetary policy committee believes that the reason for high inflation is that theyset interest rates too low. Which of the following tools can the South African Reserve Bankuse to pursue a contractionary monetary policy?

(i)

Selling bonds to the public(ii) Increasing the required reserve ratio(iii)

Increasing the Repo rate(iv) Increase government spending

A. only (i) and (iv) are correctB. only (ii) and (iii) are correctC.

only (i), (ii) and (iii) are correctD. only (ii), (iii) and (iv) are correctE. (i), (ii), (iii) and (iv) are correct

MCQ 2If inflation is high and actual real GDP is above potential real GDP, the South Africanreserve Bank (SARB) should _______ the supply of reserves to the banking system; themoney supply curve will shift to the _______ ; the equilibrium interest rate will _______; thequantity of loanable funds in the market will _______; and aggregate expenditure will

_______.

A. increase; left; increase; decrease; decreaseB.

decrease; left; increase; decrease; increaseC. decrease; left; increase; decrease; decreaseD.

decrease; right; decrease; increase; decreaseE.

increase; right; decrease; increase; increase

MCQ 3Suppose the SARB buys R100 million government securities in the open market. Which ofthe following effects is/are associated with such an action?

(i) An increase in short run interest rates(ii)

An increase in the monetary base

(iii)

A decrease in the long term real interest rate(iv) A decrease in the supply of loanable funds(v) An increase in investment(vi) An increase in net exports

A.

Only (i), (iv) and (v) are correctB. Only (ii), (iii), (v) and (vi) are correctC.

Only (ii), (v) and (vi) are correctD. Only (iii) and (vi) are correctE. Only (i), (ii), (iii) and (v) are correct


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MCQ 4

Given the scenario shown in the graph below, what would you recommend the Governor ofthe South African Reserve Bank do so that she meets her mandate of maintaining pricestability?

A.

Lower the bank rate and buy securities.B. Raise the bank rate and buy securities.C.

Lower the bank rate and sell securities.D. Raise the bank rate and sell securities.E. None of the above.

MCQ 5Assume the following situation in the South African economy:

The South African Reserve Bank (SARB) should ________ the supply of reserves to the banking system; the money supply curve will shift to the________; the equilibrium interestrate will ________ ; the quantity of loanable funds in the market will________ ; andaggregate expenditure will _______ .

A. Increase; left; increase; decrease; decrease.B.

Decrease; left; increase; decrease; increase.C. Decrease; right; increase; decrease; decrease.D.

Increase; right; increase; increase; decrease.E. Increase; right; decrease; increase; increase.

SAS

AD

LASP

Real GDP

LAS

SAS

AD

P

Real GDP


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Macro Tutorial 8 Chapter 29

Written question 1

Suppose current real GDP equals long-run potential real GDP and that the monetary policy

committee adopts an easy (i.e. expansionary) monetary policy believing it will increase realGDP. Discuss the likely outcomes of such a policy. Use diagrams to illustrate your answer.

MCQ 1Which of the following is/are correct?

(i) Fiscal policy has no effect on aggregate demand when the quantity of moneydemanded is highly sensitive to the interest rate

(ii) For an economy that is at full employment, an increase in government

spending will completely crowd out investment(iii) Fiscal policy has the largest effect on aggregate demand when expenditure iscompletely insensitive to the interest rate

(iv) Monetary policy has the largest effect on aggregate demand when expenditureis highly sensitive to the interest rate

(v)

Monetary policy has no effect on aggregate demand when the quantity ofmoney demanded is completely insensitive to the interest rate

A. Only (i) and (iii) are correctB. Only (i), (ii) and (iv) are correctC.

Only (ii), (iii) and (iv) are correct

D.

Only (i), (iii) and (v) are correctE. Only (ii), (iii) and (v) are correct

MCQ 2Which one of the following statements is/are correct regarding the second round effects of acontractionary fiscal policy?

(i) Money demand increases, which causes the interest rate to increase.(ii) The decrease in output and subsequent change in money demand causes

people to buy more bonds. This causes the price of bonds to increase and

interest rates to decrease.(iii)

A decrease in the price level causes money supply to increase.(iv)

The decrease in the price level and the subsequent change in money supplydecreases interest sensitive expenditure.

(v)

The overall interest rate increase is shown as a movement along the interestsensitive expenditure curve.

A.

Only (i) and (ii) are correctB. Only (ii) and (iii) are correctC.

Only (iii) and (iv) are correctD. Only (ii), (iii) and (iv) are correctE.

Only (ii), (iii) and (v) are correct


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MCQ 3

Following an increase in government spending, the first round effects result in a shift of theaggregate demand curve ________. The second round effects see ________ in the demandfor money which leads to ________ in the interest rate. This now shifts the aggregate demandcurve ________ as a result of the change in the interest rate.

A. rightwards, an increase, an increase, leftwardsA.

leftwards, a decrease, a decrease, rightwardsB. rightwards, a decrease, an increase, leftwardsC.

rightwards, a decrease, an increase, leftwardsE. rightwards, an increase, a decrease, leftwards

MCQ 4

All things equal, an expansionary monetary policy is most effective when:

A.

The interest elasticity of aggregate spending is high and the interest elasticity ofmoney demand is high.

B.

The interest elasticity of aggregate spending is high and the interest elasticity ofmoney demand is low.

C.

The interest elasticity of aggregate spending is low and the interest elasticity ofmoney demand is low.

D. The interest elasticity of aggregate spending is low and the interest elasticity ofmoney demand is high.

E. None of the above.

MCQ 5Suppose that the South African economy is in a recession. The SARB decides to usemonetary policy in an attempt to get the economy functioning at full employment. Underwhich of the following economic conditions will this be the most effective:

A. Low responsiveness of expenditure to the interest rate and high responsiveness of thequantity of money demanded to the interest rate

B. High responsiveness of expenditure to the interest rate and high responsiveness of thequantity of money demanded to the interest rate

C.

Low responsiveness of expenditure to the interest rate and low responsiveness of the

quantity of money demanded to the interest rateD. High responsiveness of expenditure to the interest rate and low responsiveness of thequantity of money demanded to the interest rate

E. None of the above are correct


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Macro tutori al 9 Chapter 29 app & 30

Written Questions 1

Suppose current real GDP is below long-run potential real GDP and that the monetary policy

committee adopts an easy monetary policy and the government increases spending. Discussthe likely outcomes of such a policy. Use diagrams to illustrate your answer.

MCQ 1The real interest rate is the nominal interest rate:

A. minus the inflation rateB. minus the growth rateC.

plus the inflation rateD. divided by the inflation rateE. divided by growth rate

MCQ 2When the annual inflation rate is higher than people have anticipated then:

A. fixed income earners benefitB. debtors are hurtC. flexible income receivers are more affected than any other groupD. creditors are harmedE. savers benefit

MCQ 3Which of the following statements is/are correct?

(i) The short-run Phillips curve shows that if inflation rises above its expectedrate, the unemployment rate falls below its natural rate.

(ii) The short-run Phillips curve shows that if inflation rises above its expectedrate, the unemployment rate rises above its natural rate.

(iii) The long run Phillips curve shows the relationship between inflation andunemployment when the actual inflation rate equals the expected inflation rate.

(iv)

A change in the natural rate of unemployment shifts the long run Phillipscurve but not the short-run Phillips curve.

A.

Only options (i) and (iii) are correct.B. Only options (ii) and (iii) are correct.C.

Only options (i) and (iv) are correct.D. Only options (i), (iii) and (iv) are correct.E. Only options (ii), (iii) and (iv) are correct.


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MCQ 4Consider the IS-LM model. A contractionary monetary policy action in conjunction with anexpansionary fiscal policy action will result in which of the following options?

A.

A definite increase in the interest rate and a definite decrease in the equilibrium levelof output.

B.

A definite increase in the interest rate and an indefinite change in the equilibriumlevel of output.

C.

A definite decrease in the interest rate and an indefinite change in the equilibriumlevel of output.

D. A definite decrease in the interest rate and a definite increase in the equilibrium levelof output.

E. An indefinite change in the interest rate and an indefinite change in the equilibriumlevel of output.

MCQ 5This year, while the government has increased lump sum taxes and expenditure on education,the actions of COSATU have resulted in the wages of nurses and teachers rising. In the Gulfof Mexico, BP’s oil rig exploded, causing transport and food prices to rise. Which of the

following statements is/are true?

(i)

Higher wages and increased transport costs will likely cause cost-pushinflation.

(ii)

Higher wages and increased lump sum taxes will likely cause cost-pushinflation.

(iii)

Increased transport costs and increased government expenditure bygovernment will likely cause demand-pull inflation.

(iv) Increased government spending on education in conjunction with increasedlump sum taxes will likely cause demand-pull inflation.

A. Only (i) is correct.A.

Only (i) and (ii) are correct.B. Only (i) and (iv) are correct.C. Only (ii) and (iv) are correct.E. Only (ii) and (iii) are correct.

Macro tutorial 10 Chapter 30 & 33


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Written question 1

South Africa currently adopts a flexible exchange rate policy whereas China adopts a fixedexchange rate. List 3 advantages and 3 disadvantages of each and briefly (3 – 5 sentences)

explain why South Africa adopts a flexible exchange rate policy.

Written question 2

Apple has recently launched the iPhone 4. South African consumers have a choice of either purchasing the phone locally or directly from the USA. Suppose the following:

Price of iPhone 4 in USA: $300Price of iPhone 4 in SA: R2700Current exchange rate: R8/$

Does purchasing power parity (PPP) hold? If not, fully explain the transmission mechanismthat leads to PPP. (The USA price includes all costs such as transportation, exchange rate feesetc.)

MCQ 1Use the following diagram to answer the following question. It shows the Rand price of 1Dollar.

American consumers discover that Mrs Ball’s Chutney is tastier than Heinz Ketchup. When

they import more of Mrs Ball’s Chutney from South Africa, then under a flexible exchange

rate regime:

A.

the demand for Dollars increases and the Rand depreciates.B. the supply of Dollars increases and the Rand appreciates.C. the demand for Dollars decreases and the Rand appreciates.D.

the supply of Dollars decreases and the Rand depreciates.

E.

nothing, because the flexible exchange rate prevents the change in the exchange rate.MCQ 2

S$

Quantity of Dollars

D$

Rand per

Dollar

e


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Assume that a calculator costs R56 in South Africa and $7 in the United States. If theexchange rate is R6/Dollar ($) and purchasing power parity does not prevail then:

(i) People will sell Rands on the foreign exchange market and the value of theRand will fall.

(ii)

People will sell Dollars on the foreign exchange market and the value of the Randwill fall.

(iii)

People will buy Dollars on the foreign exchange market and the value of theDollar will rise.

(iv)

People will buy Rands on the foreign exchange market and the value of the Randwill rise.

(v) People will buy Rands on the foreign exchange market and the value of theDollar will rise.

A. Only (i) and (iii) are correct.B.

Only (ii) and (iv) are correct.

C.

Only (i) is correct.D. Only (iv) and (v) is correct.E.

Only (ii), (iii) and (v) are correct.

MCQ 3 Near the end of 2008, the Rand to Euro exchange rate was almost R14/euro. Assuming thatSouth Africa and the EU are the only two areas in the world and that the exchange rate is nowR10/Euro, we can say that:

(i)

the rand has depreciated since 2008.(ii)

the rand has increased in value since 2008.(iii) the quantity of rands that people plan to buy in the foreign market has increased

from 2008.(iv)

the quantity of euro that people plan to sell in the foreign market has increasedfrom 2008.

(v)

the quantity of South African goods exported has decreased since 2008 as a resultof the change in the exchange rate.

A.

Only (i) and (ii) are correct.B. Only (ii), (iii), (iv) and (v) are correct.

C.

Only (ii) and (v) are correct.D. Only (i) and (v) are correct.E. All of the above are correct.


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MCQ 4

Which of the following best describes a policy moving the economy to the left along a short-run Phillips curve?

A.

A contractionary monetary policy designed to reduce inflation

B.

An expansionary monetary policy designed to reduce inflationC. An expansionary monetary policy designed to reduce unemploymentD.

A contractionary monetary policy designed to reduce unemploymentE. None of the above options is/are correct

MCQ 5An increase in South Africa’s interest rates will most likely lead to the following:

A.

A reduction in the demand for South Africa’s goods and services in the international

marketB.

An increase in the demand for other currencies besides the Rand in the foreignexchange market

C. A depreciation of the South African RandD.

An increase in exports by South AfricaE. An increase in the supply of the Rand in the foreign exchange market

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